The GSE implicit subsidy and value of government ambiguity
By Wayne Passmore. 2003
119 citations recorded by the source corpus.
The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the \\"GSEs\\") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the federal government's implicit subsidy of Fannie Mae and Freddie Mac has resulted in a funding advantage for the GSEs over private sector institutions, (2) the actions of GSEs result in slightly lower mortgage rates for some homeowners, (3) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, (4) the implicit government subsidy accounts for much of the GSEs' market value, (5) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to-asset ratios would be higher if they were purely private, and (6) the GSEs' implicit subsidy does not appear to have substantially increased homeownership or homebuilding.
Subfields: Accounting, Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/75ac93ecb6d14418fa7f2f16bbcc7dcbfcc20e9e
Citations in the corpus
- Fussing and Fuming Over Fannie and Freddie: How Much Smoke, How Much Fire? (2005, unknown): “Systemic Risk In recent testimony before Congress, Federal Reserve Chairman Greenspan (2004) suggested that Fannie Mae and Freddie Mac may pose “systemic risks” to the U.S. economy.”
- Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-09 (2010, unknown): “In fact, the literature has quantified the transfer from taxpayers to the GSEs to be in the billions of dollars even before the crisis ignited (see, for example Passmore, 2005; Lucas and McDonald, 2006).”